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Federal Reserve: Constitutional? Democratic?

I was talking to someone about the John Birch Society. I was mentioning how, having come of age in the 1990s when the right-wing was on the rise, I inherited some of the Bircher paranoia toward power. Besides fear of flouride in the water, the other notion that was implanted in my young mind was the criticisms of the privately owned Federal Reserve banks.

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Despite my liberalism, in some ways I might make a better paranoid right-winger than some conservatives (although ultimately my liberal faith in humanity and reason usually wins out). I dismiss the craziest paranoid conspiracy theories proposed by right-wingers, but some of the right-wingers’ concerns are worthy of consideration. I (and many other liberals) consider the Federal Reserve to be one of these worthy concerns.

1. United States
There are no sharp criteria for determining whether an entity is a federal agency within meaning of the Federal Tort Claims Act, but critical factor is existence of federal government control over “detailed physical performance” and “day to day operation” of an entity. . .
2. United States
Federal reserve banks are not federal instrumentalities for purposes of a Federal Tort Claims Act, but are independent, privately owned and locally controlled corporations in light of fact that direct supervision and control of each bank is exercised by board of directors, federal reserve banks, though heavily regulated, are locally controlled by their member banks, banks are listed neither as “wholly owned” government corporations nor as “mixed ownership” corporations; federal reserve banks receive no appropriated funds from Congress and the banks are empowered to sue and be sued in their own names. . .
3. United States
Under the Federal Tort Claims Act, federal liability is narrowly based on traditional agency principles and does not necessarily lie when a tortfeasor simply works for an entity, like the Reserve Bank, which performs important activities for the government. . .
4. Taxation
The Reserve Banks are deemed to be federal instrumentalities for purposes of immunity from state taxation.
5. States Taxation
Tests for determining whether an entity is federal instrumentality for purposes of protection from state or local action or taxation, is very broad: whether entity performs important governmental function.

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President Wilson admitted that he had made a mistake in helping to create the Federal Reserve and that it had destroyed our democracy (The New Freedom: A Call For the Emancipation of the Generous Energies of a People, chapter 8 Monopoly, or Opportunity?)

I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world.No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.

Let me issue and control a nation’s money, and I care not who writes its laws.
~ Mayer Amschel Bauer Rothschild (1773-1855), London financier, one of the founders of the international Rothschild banking dynasty, 1838.

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I would actually argue that controlling the stories, mythologies, and political narratives of a society is a greater power. But who controls the banking system controls the money supply. Who controls the money supply controls the economy. Who controls the economy controls who owns the media. And who owns the media controls the stories, mythologies, and political narratives of a society. So, sadly, it does go all the way back to the bankers.

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Whether or not one believes the Federal Reserve is essentially privately owned or controlled, it can’t be denied that it is one of the most (if not the most) powerful institutions in the US (and maybe the world) and one of the least (if not the least) democratic institution in the US. Many of the problematic economic decisions in recent history didn’t come from democratically elected leaders (even making the large assumption that democracy is still functioning). The Federal Reserve has made many decisions about our economy and there has been very little oversight even by Congress which theoretically has oversight. And, whether or not one favors democracy, the Federal Reserve doesn’t even make sense according to the small ‘r’ republican notion of a government that is free of both the influence of monarchy and private economic interests.

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There is nothing representative about the Federal Reserve. I see all of our major problems going to this rot within the highest echelons of our political and economic system. This rot isn’t limited to the Federal Reserve, but the Federal Reserve (along with the Military-Industrial Complex) is one of the institutions that represents this rot. This is concentrated power at its worse, meaning undemocratic, unrepresentative and largely unregulated. It’s a power unto itself beyond external control.

It (Central Bank ) gives the National Bank almost complete control of national finance. The few who understand the system will either be so interested in its profits, or so dependent on its favours, that there will be no opposition from that class… The great body of the people, mentally incapable of comprehending, will bear its burden without complaint, and perhaps without even suspecting that the system is inimical (contrary) to their interests.
– Rothschild Brothers of London writing to their associates in New York, June 25, 1863.

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There is even question of whether the Federal Reserve is constitutional.

Article 1, Section 8 states that Congress shall have the power to coin (create) money and regulate the value thereof. In 1935, the US Supreme Court ruled the Congress cannot constitutionally delegate its power to another group or body.

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It depends on the meaning of delegating and what can be delegated. Jefferson thought a central bank was unconstitutional by definition as it isn’t enumerated in the constitution. But there is the further question of ownership. The 12 Federal Reserve banks are privately owned, but defenders of the Federal Reserve argue that nonetheless these privately owned banks are under the direct control of the President and Congress along with those in the Federal Reserve who are appointed through the political process.

So, it becomes an issue of how much power and influence the member banks have over the Federal Reserve vs how much power and influence the Federal Reserve has over the member banks. And it becomes an issue of which specific private interests own, control or otherwise has influence over the member banks. The fact that the Federal Reserve is so secretive makes these issues unclear. Also, the fact that the Federal Reserve bailed out foreign banks makes this lack of clarity downright murky, to say the least.

It’s impossible for the average person (or maybe even the average politician) to know what the Federal Reserve is and how it operates. Knowledge is power and ignorance is powerlessness. Secrecy is the province of authoritarian power structures which is antithetical to democracy.

Is a central bank constitutional? Second, even if a central bank is constitutional, is it constitutional for Congress to delegate its power to the Federal Reserve which includes privately owned banks? There is neither a clear and unquestionable constitutional validity to the general principle of a central bank nor specifically to the Federal Reserve. Then again, there isn’t a clear and unquestionable constitutional validity to most of what the government does. The constitution was vague and limited in what it spoke about.

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Eisenhower (who the Birchers called a commie) wrote,

You keep harping on the Constitution; I should like to point out that the meaning of the Constitution is what the Supreme Court says it is. Consequently no powers are exercised by the Federal government except where such exercise is approved by the Supreme Court (lawyers) of the land.

I admit that the Supreme Court has in the past made certain decisions in this general field that have been astonishing to me. A recent case in point was the decision in the Phillips case. Others, and older ones, involved “interstate commerce.” But until some future Supreme Court decision denies the right and responsibility of the Federal government to do certain things, you cannot possibly remove them from the political activities of the Federal government.

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It’s interesting to hear Eisenhower’s perspective. He was an old school conservative… which means he was more liberal than most Democratic politicians today. Or, to put it another way, Eisenhower was a politician that is rarely seen today that genuinely believed in a government that served the people (“But to attain any success it is quite clear that the Federal government cannot avoid or escape responsibilities which the mass of the people firmly believe should be undertaken by it.”). Unlike cynical right-wingers, Eisenhower believed that federal government was morally justified.

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What is interesting about Eisenhower is that one could simultaneously say he was one of the most principled presidents of the 20th century and also a hypocrite. He defended democracy while criticizing the Military-Industrial Complex that undermines democracy. On the other hand, he used the CIA to overthrow the democratically-elected government of Iran and used the FBI to practice COINTELPRO on the American public. It’s sad that such a person represents the height of principled behavior among modern US presidents.

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Ignoring the hypocrisy, though, I find myself drawn toward agreement with his ‘liberal’ views of the role of government and the constitution. I differ from right-wingers in that I’m not necessarily against a central bank. It depends (as a liberal, it always comes down to “It depends”). For a smaller country with a simpler agrarian economy (such as the early US), a central bank was probably dangerous and unnecessary. However, for a larger country with a complex industrial/technological economy, a central bank may be a necessary risk. That said: Secretiveness is morally wrong in a democracy and must be fought against at every turn. And it’s probably unwise for privately owned banks to be involved in the central bank in any direct manner.

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The challenge is liberal voices such as mine are almost entirely unheard in the mainstream. The debate is made into a black/white issue of being entirely for or entirely against the Federal Reserve. Intelligent and informed nuance is lost in a battle of ideologies. As such, criticism of the Federal Reserve just gets dismissed as another right-wing conspiracy theory.